Taxability of Provident fund (PF)

The budget 2021 brings major changes in taxability of provident fund. Earlier income from provident fund i.e. contribution from employee contribution from employer and interest part is fully exempt from tax. Now government brings some changes to the earlier provision.

In broad view there are two types of provident fund the first one is public provident fund and other is recognised provident fund. The investment in PPF is done by every resident individual can invest in public provident fund. The recognised provident fund is only for salaried employees where contribution is made by employer and employee. The employee and employer each contribute 12% of basic salary plus DA to the EPF. The PPF is a general provident fund available to all individuals and the contributions are eligible for deduction u/s 80C and maturity proceeds including interest are also tax-free.

Earlier investment interest and maturity proceeds is exempt from tax now government makes changes in finance act 2021 to bring changes in the taxability of interest income of provident fund. Government introduces taxability for the interest income of provident fund. It sought to tax the interest income earned on the employee contributions of the amount of more than > 2,50,000/-.

This means the interest earned on the contributions which are more than > 2,50,000/- will be subjected to tax. The interest earned on the contribution upto > 2,50,000/- shall not be taxed.

For example

Let’s Mr A earns > 40,00,000/- in basic salary and DA. He contributes 12% of this amount to the EPF. The position of his PF account funds for F Y 2020-21 and 2021-22 will be as follows.

as per Mr. A’s salary contribution in PF is Rupees 480,000 i.e. 12% of 40,00,000 earlier full amount is tax free but as per the budget 2021 excess tax is charge in excess contribution of rupees 250000 i.e interest income of Rs.19550 on Rs.230000 is taxable

The interest income will be taxed as income from other sources and shall be taxed at prevalent rates of tax. The TDS will be done by EPFO on the accrued amount of interest every year as of 31st March. The rate of TDS shall be 10% of the interest income. This TDS, you can claim a tax credit in your ITR.

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This article is for information only and written as per the provision given under income tax law and finance act 2021. For any other information please contact on mail brijlavaniya@yahoo.com and whatsapp 8879882025.